The big four firms were criticised during the credit crunch for being too cosy with clients and giving many of the worst-hit banks – including Northern Rock – a clean bill of health. Photograph: Alessia Pierdomenico/Reuters

The competition authorities are launching a full-scale inquiry into the big four auditors, which earn nearly 99% of the fees paid by the UK's biggest companies.

PricewaterhouseCoopers audits more companies in the FTSE 100 index than any of its rivals, with Deloitte and KPMG having about the same number of clients and Ernst & Young also taking a share of the business.

The big four firms were criticised at the time of the credit crunch for being too cosy with their clients and giving many of the worst-hit banks – including Northern Rock, Royal Bank of Scotland and Lloyds – a clean bill of health.

John Fingleton, OFT chief executive, said: "The market for large company audits lacks sufficient competition and does not work well for customers. It is highly concentrated, largely supplied by four big firms, with clients rarely switching between auditors. There are also high barriers to entry for new and smaller competitors. These are not the indicators of a competitive market."

But the auditors are putting up a fight. "There is fierce rivalry as we compete vigorously for audit appointments," said Richard Sexton, a partner at PwC. "All of our audit engagements are for one year only, after which shareholders must vote again to decide on our reappointment."

KPMG said: "There is already effective competition and pricing in the UK audit market." However, it promised to "co-operate fully" throughout the inquiry. Deloitte said the UK market was "highly competitive", while E&Y also claimed there was strong competition.

The referral comes as Brussels is working on plans that could break up the "big four" by shearing off their consultancy arms from their auditing practices.